BOPM and BSM

1. © 2018 Dr. N. Richie, UNCW 1
Options Pricing
BOPM and BSM Models

2. © 2018 Dr. N. Richie, UNCW 2
Use the binomial option pricing model to
determine the value of the call and the
appropriate hedge ratios given the
following information
• Stock currently trading at $20 per share
• European call strike price is $20
• Standard deviation of stock returns is 25%
• Risk free rate is 5%
• Option expires in 85 days (using 365 day year)
• BOPM using 2 nodes

3. 3
Use the Black-Scholes-Merton model to
determine the value of the call given the
following information
• Stock currently trading at $20 per share
• European call strike price is $20
• Standard deviation of stock returns is 25%
• Risk free rate is 5%
• Option expires in 85 days (using 365 day year)
What is the value of the corresponding put?

4. © 2018 Dr. N. Richie, UNCW 4
Use the binomial option pricing model to
determine the value of the call and the
appropriate hedge ratios given the
following information
• Stock currently trading at $45 per share
• European call strike price is $40
• Standard deviation of stock returns is 35%
• Risk free rate is 5%
• Option expires in 150 days (using 365 day year)
• BOPM using 3 nodes

5. 5
Use the Black-Scholes-Merton model to
determine the value of the call given the
following information
• Stock currently trading at $45 per share
• European call strike price is $40
• Standard deviation of stock returns is 35%
• Risk free rate is 5%
• Option expires in 150 days (using 365 day year)
What is the value of the corresponding put?

6. © 2018 Dr. N. Richie, UNCW 6
Use the binomial option pricing model to
determine the value of the put and the
appropriate hedge ratios given the
following information
• Stock currently trading at $45 per share
• European put strike price is $48
• Standard deviation of stock returns is 25%
• Risk free rate is 6%
• Option expires in 200 days (using 365 day year)
• BOPM using 4 nodes